Mortgage rates to rise, but not because of tapering (yet)

The Federal Reserve's announcement Wednesday that it would reduce its bond-buying by $10 billion a month was seen generally as a moderate start to the highly anticipated taper.As such, mortgage rates, which follow bond yields, did not rise dramatically, as some had predicted.

"I was relieved by how the market has reacted so far and that we didn't see a sharp rise in interest rates as a result of the Fed telling us that they were going to start tapering," said Craig Strent, CEO of Apex Home Loans in Rockville, Md. "That certainly could have happened,"

The average rate on the conforming 30-year fixed mortgage has been at 4.57 percent since last week, according to Mortgage News Daily. But concern about the Fed's potential move may have been behind a sharp drop in weekly mortgage applications, down 5.5 percent week over week, to the lowest level in 12 years.

"Mortgage interest rates generally hate the idea of uncertainty, so this definitely brings some certainty in terms of the Fed showing their cards as far as the direction of rates," Strent said.

The Fed's move comes as Fannie Mae and Freddie Mac, which control two-thirds of the mortgage market, are practicing their own form of tapering. The government-owned entities announced late Monday that they are raising overall guarantee fees to lenders, as well as raising loan-level guarantee fees to lenders on loans where borrowers have good but not the best credit scores. These fees are passed on to borrowers.

"The new pricing continues the gradual progression towards more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital," wrote Edward DeMarco, acting director of the Federal Housing Finance Agency, in a release earlier this month. "These changes should encourage further return of private capital to the mortgage market."

It is also an attempt to reduce Fannie and Freddie's own market share. The private mortgage market is still on life support, as very few lenders have returned since the credit crisis.

"Of the two announcements in the last 24 hours, by far the bigger ... was by Fannie Mae," said Christopher Meyer, a professor of real estate at Columbia Business School. "Particularly if you're a first-time homebuyer who's looking to put less than 20 percent down—you could see mortgage rates rise by as much as 4/10s of a percent.

Housing starts, down in September and October for the first time since 2011, rose 22.7 percent last month, CNBC's Diana Olick reports. Also, a look at the recent drop in mortgage applications.

Matthew Graham at Mortgage News Daily said that even though rates will surely rise as the Federal Reserve continues to curtail its monthly asset-buying, things will follow a certain trajectory in any event.

"A borrower with a 750 credit score and 15 percent down would likely get a rate of 4.625 percent now but will get closer to a 4.875 percent rate when the new loan pricing goes into effect in March," he said. "When the changes actually take place is a bit of a moving target, because different lenders will adjust their pricing at different times. Still, we can expect to see rates move up as early as January."

The housing market is finally finding its feet again. While sales have dipped in the fourth quarter, optimism—especially among homebuilders—is rising. Pent-up demand has some claiming that housing will rebound even more strongly in 2014, while others argue higher rates could change that.

"At a time when the market is fragile, this is going to discourage certain borrowers, who are now going to be paying higher rates as a result of these new adjustments," said Eric Egenhoefer, CEO of Wisconsin-based Waterstone Mortgage. "There will be unintended consequences here, and we are concerned about the effect on affordability for homebuyers."